ture year beyond 1988.

The tax burden on the self-employed would continue in every fuDuring the next 10 years the unfair tax burden would be approximately $3,600 for a typical self-employed worker above what would be paid by the employee worker. Thus, the tax burden would increase about 25% higher for the average self-employed worker than the increase in tax burden for the employee worker.

If a change in the tax structure is necessary, a 25 percent tax credit would reduce most of the harm of this proposed tax increase even with 50 percent deductibility. The loss of personal income tax receipts would average only about $0.9 billion each year. We will be pleased to examine other alternatives to our proposed technical improvement (see Tables 7 and 8).

TABLE 7

COMMISSION'S PROPOSED SELF-EMPLOYED SOCIAL SECURITY TAX INCREASE
(Billions of Dollars)

1/Source:

2/

National Commission on Social Security Reform, Actuarial Cost Estimates
for OASDI and HI and for Various Possible Changes in OASDI. Other
estimates range from $9 billion to $12 billion.

By contrast, Commission's proposal for refundable tax credit for employee workers in 1984 is estimated to cost $9.4 billion.

3. The Commission's proposed self-employed worker tax increase
would be regressive and greatly increase
the tax burden on

Lower income self-employed workers in contrast to upper
Income self-employed workers

This is clear by reviewing Tables 3 and 4. The tax burden for lower income self-employed workers would increase by 20 to 40 percent while the increase in tax burden for upper income self-employed would only go as high as 10 percent.

The Commission's proposal of the deductibility of one-half the OASDI tax is of limited value except for the very few self-employed persons with very high incomes and subject to the 50 percent personal income tax rate. These few rich self-employed people would be treated fairly while 99 percent of the self-employed workers with lower incomes would experience an increase in tax burden.

The Commission may have seen a "tax deduction" as an offset that would result in little net increase in tax payments by the self-employed workers as indicated by Commission staff working papers (See Commission Memorandum 56). For example, the following footnote from the Commission's options paper:

In conjunction with this proposal, a tax credit for the self-employed equal to 25% of the self-employment tax could be provided. Alternatively, 50% of the payroll tax paid by the self-employed could be made tax deductible as a business expense. (Emphasis supplied.)

It

Clearly, the tax deduction does not provide a fair offset. approaches full offset only for those self-employed taxpayers in the highest of tax brackets.

Even the tax credit, if not made refundable, would not remove the burden that this self-employed tax increase would place on the lowest income self-employed workers that have little or no income tax liability.

When considering proposed benefit changes, the Commission proposes that the tax burden should fall on those most able to

afford it $20,000

-

-

- Social Security recipients whose other income exceeds

who would pay personal income taxes for the first time on their Social Security benefit payments. The Commission in sharp contrast recommends perhaps the greatest share of the tax change in the case of self-employed workers, on those least able to bear it.

In fact, the tax increase on the self-employed workers is the

largest tax increase in U.S. history.

This significant difference in tax treatment suggests that the results of the Commission's proposal affecting self-employed workers may not have been intended or understood.

4.

The Commission's proposed tax increase would be unfair to
self-employed workers in every State of the Union

In the State of Texas, for example, 483,982 self-employed workers would pay $731.3 million increase in after-tax personal income tax burden from 1984 to 1989, that is, if the selfemployed workers in Texas are not driven to abandon their choice of being self-employed because of this heavy tax burden (see Table 7).

Based on a net tax increase of $10 billion over 1984-89.
This figure, based on the 1980 Census, is 1.861 million less than the number
of self-employed workers reported by the Bureau of Labor Statistics which is
based on the Current Population Survey (CPS). The cause of this discrepancy
is believed to be due to a more expansive definition of self-employed by the
CPS.

Source:

U.S. Department of Commerce, Bureau of the Census, 1980 Census of
Population and Housing, Provisional Estimates of Social, Economic,
and Housing Characteristics, PHC80-S1-1.

5.

The Commission's proposal would hurt the smallest of small
business

Self-employed workers are already disadvantaged by the fact:

(1)

(2)

They do not have the financial protection from unemployment which is provided to employed workers through unemployment compensation programs which are, in part, now subsidized by loans from the Federal government.

They do not have the protection from liability which the corporate form provides for most employed workers through corporations' limited liability.

(3) They are not able to treat as a business expense the cost of insurance premiums for health insurance. This contrasts with the ability of employers to expense this

(4)

common item of cost of employee workers.

They are not able to treat as a business expense all of

the costs of providing pensions.

In addition, deductions of the cost of employed workers, most of whom work for corporations, are of much greater value than are deductions for self-employed workers. The average effective income tax rate (Federal, State and local) on corporations is about 33 percent compared to an average 18 percent or less for self-employed workers. Thus, the Commission's proposal to allow a 50 percent deduction of the OASDI tax for both employee and employer, and to allow a 50 percent deduction for OASDI for the self-employed, does not have the same value. It is much less valuable to the self-employed.